Budget Standoff Has Stock Investors Wary, Not Panicked

Benchmarks Close Lower But Many Expect Impact to Be Short Term

By

Alexandra Scaggs

Updated Sept. 30, 2013 5:24 p.m. ET

U.S. stocks tumbled for the seventh time in eight trading sessions, capping a day on which investors around the globe sold shares as they braced for the U.S. government to partially shut down for the first time in 17 years.

Many investors fretted that budgetary uncertainty and the prospect that the U.S. could run out of borrowing capacity in October will add to market headwinds amid soft global economic growth, slowing corporate profit gains and a pickup in interest rates.

Also unsettling investors is political instability in Italy, where the government is teetering on the brink of collapse. Milan's FTSE MIB stock index was down 1.2%, while 10-year Italian government bond yields reached a three-month high above 4.7%.

On Monday, the Dow Jones Industrial Average dropped 128.57 points, or 0.8%, to 15129.67. The S&P 500-stock index shed 10.20 points, or 0.6%, to 1681.55, with all 10 sectors lower. The Nasdaq Composite Index fell 10.12 points, or 0.3%, to 3771.48.

Even with Monday's losses, stocks performed strongly in the quarter and year. The Dow is up 15.5% for the year, after a 1.5% advance in the third quarter. The S&P 500 rose 3% for September and 4.7% in the third quarter.

"Despite the naysayers, it looks like September is turning out to be a positive month," said Alan Gayle, who oversees about $325 million as senior investment strategist at RidgeWorth Investments. "But the uncertainty surrounding the [budget] and debt ceiling makes investors nervous."

Stocks sold off sharply at the market's open as worries spread about budget negotiations. At its session low, the Dow had shed 172 points. Traders said that market action indicated little panic.

Small stocks lost less than their larger peers, another sign that investors weren't rushing for the exits. The Russell 2000 Index, a benchmark for small-capitalization stocks, was down less than 0.1% for the day.

The battles in Congress have been weighing on markets for over a week. The S&P 500 has lost 2.5% since closing at an all-time high of 1725.52 on Sept. 18.

Investors also may have to contend with some key economic data points this week. A measure of manufacturing activity is scheduled for Tuesday, a service-sector business activity reading will come Thursday, and then Friday may bring the closely watched government employment report for September, if the government is operating normally.

The labor market is a main driver of Federal Reserve policy decisions, so the strength of Friday's report could help determine when the central bank starts to pare its stimulus efforts.

"In a normal week, every one of these releases would take center stage," said Joseph Tanious, global market strategist at J.P. Morgan Funds. "Unfortunately, Washington's theatrics are overshadowing the data."

"In a normal week, every one of these releases would take center stage," said Joseph Tanious, global market strategist at J.P. Morgan Funds. "Unfortunately, Washington's theatrics are overshadowing the data."

The yield on 10-year Treasury notes pulled back slightly, to 2.614% from 2.620%, where it settled Friday. Yields move inversely to prices.

Crude-oil futures fell 0.5% to settle at $102.33 a barrel. Gold futures eased 0.9% to $1,326.50 a troy ounce. The dollar slipped against the yen and edged up against the euro.

Asian markets also were mostly lower, led by a 2.1% slide in Japan's Nikkei Stock Average on the back of U.S. worries and a strengthening yen.

In corporate news, J.C. Penney Co.JCP-0.24% Inc. slipped 25 cents, or 2.7%, to $8.80. On Friday, the stock tumbled 13% to the lowest close since December 2000 after the retailer sold 84 million shares, priced at a 7.4% discount to the stock's closing price on Thursday.

Tesla Motors Inc.TSLA-0.24% rose 2.47, or 1.3%, to 193.37, a new all-time closing high. Its latest rally has been fueled in part by last week's news that Hertz Global Holdings Inc.HTZ2.29% added one of the electric car maker's models to its high-end rental line-up. The stock has more than quadrupled in value this year.

The market is due for a correction Business has squeezed the life from all the "stimulous" actions and put the benefits toward their bottom line (as one would expect).

We now have the opportunity of looking at the long term prospects of our economy under the Democrats. I will take a short term hit, but the correction is necessary for the long term prospects of America.

We shall see. It could be that the markets prefer a longer term change to our priorities. Maybe ones that creates jobs by encouraging investment in new ventures. The silly part is that when the Republicans wanted to repeal the tax on medical devices, the Senate rejected the proposal, even though a large majority of Democrats approved it and Obama will repeal it as soon as it is politically feasible.

Markets have been looking for an excuse to correct after 20% runup on 5% earnings (thank the bernank). Now everyone is looking to buy back in if the correction happens - where else one would get meaningful yields, unless interest rates go up?

Just the ones that haven't been trading back in the Carter days and forward, we wouldn't have this problem if NIXON would not have taken us of the gold standard, for those that don't know if you have a dollar it's backed by a dollar of gold the lunatic in the white house doesn't have a clue, that also goes for all the dems and reps, their all dumber then a box of rocks, now shut it down !

Ridiculous assertions Ms. Duke. In the first place, you lose all credibility when you call Republicans the "party of hate" because they are trying to avert the damage inflicted by the ACA on millions of Americans and to instill some sense of fiscal responsibility into the federal government (I concede that the last time Republicans were in power they did not exercise fiscal responsibility either and I condemn them for that). Secondly, what you say is simply untrue. Retirees and military veterans aren't going to miss one payment that they have coming to them because of a so-called "shut down."

Let say this the market low WILL be no lower then 14750, when that comes it will head north to resistance of 15650 then we see if it breaks thru that , I've been doing this since 92, and believe me I'm not broke so sit back and do a few vertical spreads and maybe a put or two ! Also shut it down they do this every year with this idiot, his famous scare tactics, hard to be afraid of a guy without a brain !It's a shame Nixon took us off the gold standard this would put a crimp in goof balls spending habits and cure this yearly problem .......

I went thru 17 Fed. gov. shut downs from Ford thru Clinton. I assure all readers of this piece that the world shall not come to end. In my judgment there are other factors at work in the markets downturn--like an overly extended market.

The big banks are still insolvent. They only appear healthy thanks to the Bernank. If they had to take back all of their stinky paper it would collapse overnight. What are they going to do with all of the toxic debt when the economy enters a recession again?

That was a farce.. it was that we decided and guess what - the government decided to spend MORE. Basically Moody's was worried about the ability for the USA to pay its debts. They weren't at all afraid that the government shutdown would be forever. They are afraid that the amount we pay on the interest every year ( 300 billion) will go up. The more it goes up, the less we have to spend on other things, the less able we will be able to pay our spiraling debt problem.

I seem to remember the Republican line about Obama and taxes was a concern about instability and doubt about tax policy. No one was sure what would happen, so how could companies make good financial decisions, like hiring and investment. He was keeping the economy from recovering!

Seems that that was a total load of BS, as the same Republicans take every opportunity to mess the the well-being of the entire financial system (debt ceiling). Undercutting the reserve currency will be bad for everyone, including the banks (though I think somehow they will manage to be just fine).

Just so you know a lot of folks with money support Obama also. Why not. In the end Obama care will pay off big for the rich as companies dump healthcare and just turn it over to the government. You know how rich companies got out of the pension business by switching to 401K plans.

No matter what happens, one political faction or the other is not going to like the result, and will bail out. I am not sure if it's the liberals bailing out because they fear shutting down the EPA and NLRB, or if it's the conservatives bailing out because they fear the GOP is going to cave. If the stock market were not already so overbought, I'd say it's a good time to invest.... Buy on the dips.

ultimately the GOP (or rather the extremist faction pushing this crisis) will have to "cave" because their position is untenable. No matter what happens, the US government must be funded and honor sovereign debt. The market are not concerned with a temporary US shutdown, but the the prospect of default, which now seems increasingly likely. Every currency market in the world uses US treasuries as a benchmark for their own. Even a temporary US default would upend markets and likely do permanent harm to the US' status as a stable and dependable investment for world markets.

It is incredible to consider that a minority of newly elected Tea Party leaning congressmen, answerable to small local districts, would threaten the the US and world economy over a domestic law that is essentially a patina of regulation on our existing system of healthcare, which remains based on purchase of coverage through private insurers. ONe would think that if these congressmen are so confident in their belief that they are acting on the will of a majority of the US public, they would take their fight through ordinary legislative means. It is also incredible to think that this would be a completely self-inflicted wound, and unnecessary, as the US has the resources to honor it debt, a debt that is the handiwork of congress itself. Most incredible is the TP influenced members of congress the grasp this.

The market is grossly underestimating the risk premium of US treasurys anyway. Your average guy seems to think that is a good thing. He thinks that it means taxes will be lower, I guess. But that is not the way to look at it. People who buy those bonds are taking a big risk, and when the government finally does go bust, it is really going to hurt the economy in a big way. We may be looking at Detroit-like conditions or worse. A better situation would be if the risk premium of those treasurys rose now to what it should actually be, given the risk. Then at least it would show a greater appreciation of investors for the risk, and would hopefully interject greater caution by the government itself.

But none of that is going to be fixed so long as politicians do not confront the problem directly but instead avoid the scrapy fight over this that is needed to open the eyes of the investing public. If the politicians went at each other over this, it would become a whole lot clearer to investors that we are approaching the endgame, and not merely half-time.

great Tom, but the question is whether budget and debt fights are the venue to settle legislative issues. While I think it is highly unlikely (really unthinkable) that the is a US default, I think the uncertaintly is there, and this being the second time with this congress, I think that there is the chance that investors will take notice.

Rationing is a strong word. No one in this country rations health care, they "ration" payment for it. Private insurers have been and continue to be the "rationers" of payment in all but Medicare. As we don't leave indigent people on the emergency room doorstep to die when in need of care they are unable to pay for, you might argue that every American currently has health insurance, but not all Americans pay for their insurance.

Since his election, we've seen Obama's detractors base policy on what he "might do", in your example put us on a road to single payer. We could, if the opposition hadn't long ago painted themselves into a political corner, work together to make the ACA an improvement on the previous system, which all parties recognized as an unsustainable drain on business and the US economy prior to Obama's election. He ran explicitly on that premise and won.Or... we could guarantee the are on the road to single payer by doing everything we can to undermine the ACA, without offering any realistic alternative as a replacement.

Either way, the Republican effort is self defeating and idiotic. How do you "bargain" when your only chip is US funding or debt obligations (which they themselves incurred) when US citizens are left holding the bag? It's like calling your credit card company and threatening to kill your dog if they don't forgive your balance.

"...you gotta expect that everything will be on the table."but David, how can you not understand that closing down government funding can can never be "on the table", because you can never call on the bet? How, exactly, can Republicans realistically pick up their chips and go home if they decide they don't like the terms of the bet? Better question, how do folks that don't understand this obvious calculus coming out of the gate get elected in the first place?

Yeah? Well with the mounting debt and continued deficit those long term prospects don't look so bright. I don't see how a market correction correlates with the overall economy. But simpleton's like you and Harry Reid obviously do.

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